Q & A Special: What Is Ethereum & How It Works

By Elvira Rogers

Posted on Nov. 1, 2018

Blockchain as a technology and Bitcoin as a cryptocurrency has inspired the developers to create a parallel technology ecosystem that facilitates faster, secure and more efficient transactions as well as different processes. At least this is the idea that inspired Vitalik Buterin to create Ethereum Network and Ether, it’s official virtual currency. To help you understand Ethereum (generally mocked as the first cousin of the Bitcoin) below is the curated list of Q & A -

What is Ethereum?

Ethereum is a global computing network operating according to rules defined by Ethereum software.Those rules allow the Ethereum network to be programmed to complete certain types of computing tasks, with every computer on the network completing the task in parallel to ensure it is done correctly. Generally, the tasks involve money.

Vitalik Buterin has likened it to a global smartphone that can be programmed to operate according to the apps built on top of it. The apps are called Dapps because they are run by a decentralized network of computers. Mr. Buterin says he chose the name because it refers to “the hypothetical invisible medium that permeates the universe and allows light to travel.” He announced Ethereum in late 2013, but it didn’t go into operation until 2015.

Ethereum is not a virtual currency?

The Ethereum network has its own virtual currency, Ether. In the simplest sense, Ether is needed to pay the other computers on the network to complete tasks. It isn’t free to use the network.

People have also decided to buy and hold Ether, betting that it will become more valuable as more people want to use the ethereum network and need Ether to pay for the network’s computing power.

What does Ethereum have to do with Bitcoin?

Mr. Buterin was a Bitcoin aficionado, and he was inspired by its success. But he set out to build something that could do more than Bitcoin: He wanted to build a system that would make it possible to program more complex financial transactions.

The shared records of the Ethereum network — of every transaction and computation it has ever performed — are known as a blockchain, just as the shared records of all Bitcoin transactions are known as a blockchain. But Ethereum’s blockchain database is totally independent of Bitcoin’s blockchain.

Why would you want to use this network?

Let’s say two companies want to conduct a complicated financial transaction, like settling a stock option. Neither company trusts the other company to conduct the transaction on its computers. Both companies could hire a third party, like a stock exchange, to conduct the transaction, which is what they generally do today.

But that forces them to trust that third company and to pay that company fees. With Ethereum, they can conduct the transaction on a shared computer that allows them both to check the records, ideally saving on fees.

As this example suggests, Ethereum has proved attractive to financial companies that have to complete lots of complicated financial transactions with competitors they don’t trust. Many banks are looking at how Ethereum could be used as a central operating system for various trading markets, replacing today’s exchanges and middlemen. JPMorgan Chase has even created its own version of Ethereum, known as Quorum. Other companies, like Samsung and Toyota, have experimented with Ethereum as a way to keep track of products moving through supply chains that involve many players.

Dozens of large companies around the world came together this year to create the Enterprise Ethereum Alliance. The group is working to develop versions of the Ethereum software that are battle-tested enough to be used in a corporate setting.

Does that mean the world’s biggest companies will corner the market on Ether?

The versions of the Ethereum software that companies are building will most likely be used to set up private networks that would be totally separate from the public Ethereum network and that would not use the Ether currency. Some people, though, are betting that these private networks will eventually be plugged back into the public network.

I want to buy Ether, How can I do it?

Just as with Bitcoin, you can buy Ether from people who already own them on virtual currency exchanges. Most large countries have exchanges where a variety of virtual currencies can be bought with the local currency.

Now comes the most awaited question - How are Ethereum created?

Ethereum is different from Bitcoin, but that doesn’t mean you need to teleport to different technology space to ‘create’ Ethereum. In fact, just like a bitcoin, it is also mined on computers, by the Ethereum Miners, who are on the Ethereum network. The rush to create, complete and validate the transaction is pretty much similar like bitcoin network. Every 15 seconds (or less), a miner successfully races to win a bundle of new ether. The whole mining process is concentrated towards created new ether/bitcoins & offering rewards to people who join the network because this is what keeps the Ethereum blockchain going.